The two primary categories of mortgages on the market are adjustable and fixed mortgages. While the interest rates of a fixed mortgage remain unchanged, those of an ARM (adjustable rate mortgage) are periodically adjusted. Most home-buyers avoid an ARM because they want to cushion themselves against much interest in the future.
However, different regulations control the interest charged on an ARM. You can be confident that your ARM will have the best mortgage rate available in Utah at any one time with the right lender. Here are caps that control your interest rate’s adjustment:
Initial Adjustment Cap
When getting an ARM, you have an initial fixed-rate period that ranges from one month to five years. The initial adjustment cap controls how much your rate can increase after the expiry of your loan’s fixed rate period. The cap is typically 2-5%. This means that your mortgage’s interest rate cannot exceed 2-5% of the fixed rate that expired.
Subsequent Adjustment Cap
This controls how much your interest rate increases in the period following your first adjustment. The subsequent adjustment cap is generally 2%. This means that your new rates cannot exceed 2% of the previous one.
Lifetime Adjustment Cap
This limits how much your mortgage’s rates can increase cumulatively over the loan’s term. The lifetime adjustment cap usually is 5%. This means that your total mortgage rate will not exceed 5% of your initial price. Some mortgage lenders might have a higher lifetime adjustment cap.
The exact percentages of the given caps differ from one lender to another. When comparing an ARM, it is prudent to base your choice on these caps rather than the initial fixed interest rate a lender offers. This way, you will be well protected from exorbitant rates further down in your ARM repayment.